A recent IRS notice clarifies how certain Opportunity Zone investments and 2026 capital gains will be treated as the current Opportunity Zone rules transition to Opportunity Zones 2.0 on January 1, 2027.
While the notice doesn’t answer every transition question, it does provide direction on several issues taxpayers were waiting on before making investment, funding and project decisions near the end of 2026.
How Are 2026 Capital Gains Treated Under the New Rules?
The notice confirms that a taxpayer with an eligible 2026 capital gain may be able to invest that gain into an Opportunity Fund in 2027 and have the investment fall under the new Opportunity Zones 2.0 rules.
Under Opportunity Zones 2.0 rules, taxpayers will receive a five-year deferral on capital gains tax as of the date of investment in an Opportunity Fund. At the end of that five-year deferral, 10% of the original gain will be excluded from income.
This is a welcome change from the Opportunity Zones 1.0 rules, which forced all deferred gains to be included in income as of December 31, 2026, and limited the 10% exclusion only to early adopters.
For capital gains flowing through a pass-through entity, the 180-day investment period begins at more than one point. The period generally starts on the end of the entity’s taxable year, but owners may elect to use the date the entity sold the asset or the entity’s tax return due date.
Because of that timing, a gain recognized in early 2026 from a pass-through entity may be eligible to be invested in 2027 and treated under Opportunity Zones 2.0.
What Happens To Existing Projects When the Map Changes?
The new Opportunity Zone map begins January 1, 2027. Some projects located in current Opportunity Zones may no longer be located in designated zones under the new map.
The notice provides a transition rule for projects already underway before December 31, 2026. A project may continue to qualify as Opportunity Zone business property after the map changes when two requirements are met.
Before December 31, 2026:
- The project must have received at least 10% of the total estimated working capital assets needed to complete the project.
- At least 5% of that amount must have been spent.
Projects that meet those requirements may continue to qualify even when the property is no longer located in an Opportunity Zone beginning in 2027.
How Does the Notice Treat Repairs Versus Redevelopment?
For a completed project that is no longer located in an Opportunity Zone after December 31, 2026, ordinary course repairs, replacements, maintenance and modernization should not cause the development to stop qualifying. Those costs remain attached to the original development.
A larger redevelopment may be treated as a new asset. For example, converting an office building into apartments may be viewed differently than routine maintenance or updates. When that work occurs after the property is no longer located in an Opportunity Zone, the new asset may not qualify for Opportunity Zone purposes.
Can Deferred Gains Under Current Rules Be Deferred Again?
Gain deferred under the current Opportunity Zone rules cannot be deferred again when it is included in taxable income on December 31, 2026. Any gain deferred under Opportunity Zones 1.0 will be included in taxable income as of December 31, 2026. The related tax will generally be paid in April 2027.
The transition to Opportunity Zones 2.0 does not create another deferral opportunity for gain already scheduled to be recognized at the end of 2026.
How Does Valuation Affect the Amount Recognized?
For existing Opportunity Zone investments, the amount recognized at the end of 2026 will be the lesser of the investment’s value or the deferred gain.
Opportunity Zone investors should engage qualified advisors to assess the value of their investment to confirm the amount of gain that should be recognized as of December 31, 2026.
What Questions Remain Unanswered?
One unresolved issue involves property that is not in an Opportunity Zone in 2026, but will be located in an Opportunity Zone under the new map beginning in 2027. This question may arise for land slated for development in 2027 or later. Additional guidance may be needed for projects that move into designated zones under the new map.
To learn more, contact your Warren Averett advisor directly, or ask a member of our team to contact you.
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